Gasoline Options Explained

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Contents

Gasoline Options Explained

Gasoline options are option contracts in which the underlying asset is a gasoline futures contract.

The holder of a gasoline option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying gasoline futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Gasoline Option Exchanges

Gasoline option contracts are available for trading at New York Mercantile Exchange (NYMEX).

NYMEX Gasoline option prices are quoted in dollars and cents per gallon and their underlying futures are traded in lots of 42000 gallons (1000 barrels) of gasoline.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
NYMEX Gasoline Options 42000 gal
(Full Contract Specs)
American Calls | Puts

Call and Put Options

Options are divided into two classes – calls and puts. Gasoline call options are purchased by traders who are bullish about gasoline prices. Traders who believe that gasoline prices will fall can buy gasoline put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Gasoline Options vs. Gasoline Futures

Additional Leverage

Limit Potential Losses

As gasoline options only grant the right but not the obligation to assume the underlying gasoline futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a gasoline option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Gasoline Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Gasoline Futures Trading Basics

Gasoline futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gasoline (eg. 50 kiloliters) at a predetermined price on a future delivery date.

Gasoline Futures Exchanges

You can trade Gasoline futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gasoline futures prices are quoted in dollars and cents per gallon and are traded in lot sizes of 42000 gallons (1000 barrels).

TOCOM Gasoline futures are traded in units of 50 kiloliters (13210 gallons) and contract prices are quoted in yen per kiloliter.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Gasoline Futures
(Price Quotes)
RB 42000 gallons
(Full Contract Spec)
USD 9,450 (approx. 20%)
(Latest Margin Info)
TOCOM Gasoline Futures
(Price Quotes)
50 kiloliters
(Full Contract Spec)
JPY 210,000 (approx. 13%)
(Latest Margin Info)

Gasoline Futures Trading Basics

Consumers and producers of gasoline can manage gasoline price risk by purchasing and selling gasoline futures. Gasoline producers can employ a short hedge to lock in a selling price for the gasoline they produce while businesses that require gasoline can utilize a long hedge to secure a purchase price for the commodity they need.

Gasoline futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable gasoline price movement. Speculators buy gasoline futures when they believe that gasoline prices will go up. Conversely, they will sell gasoline futures when they think that gasoline prices will fall.

Learn More About Gasoline Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

4 Factors You Didn’t Know About RBOB

RBOB gasoline futures contract is listed on the Chicago Mercantile Exchange (CME) under the futures symbol RB. Although it does not receive as much general investor interest as crude oil futures, the contract serves as an essential vehicle for market participants seeking to speculate and hedge in the gasoline market.

What Is Gasoline?

Gasoline is a byproduct of the refining of crude oil. Crude oil is composed of a number of different hydrocarbons. The hydrocarbons have chains of molecules of different lengths. The longer the chains, the heavier the hydrocarbon. The different chain lengths have higher boiling points as they get longer.

Key Takeaways

  • Investors can hedge and speculate with RBOB gasoline futures, which are listed on CME under ticker RB.
  • Futures contracts are bought on margin and this added leverage can magnify gains or losses.
  • Since RBOB gasoline futures involve the delivery of 42,000 gallons of gasoline per contract, traders want to close any positions before key delivery dates.
  • Some traders prefer calendar spreads rather than long or short futures positions because the risk (and margin requirements) are much less.
  • Lastly, options strategies, such as vertical spreads, can be initiated to participate in the next move in gasoline.

Oil refineries separate out the different chains by heating the crude oil to certain vaporization points. Gasoline is created by the vaporization of chains with boiling points below that of water. These different chains are blended together in various amounts to provide a consistent product for gasoline.

What Fuels Gasoline Prices?

RBOB stands for reformulated blendstock for oxygenate blending. Prices for RBOB gasoline futures logically have a high degree of correlation with crude oil since gasoline is distilled from crude. Thus, some of the global supply and demand factors for crude oil also apply to RBOB.

Still, the RBOB market has its own supply and demand factors. For example, since many of the refineries for gasoline are located in the U.S. Gulf Coast region, weather issues in that area can drive up the price for RBOB. Another important factor to consider is that gasoline is heavily taxed in many jurisdictions. This can also impact supply and demand for RBOB.

How Is Gasoline Traded?

The price for the RBOB gasoline futures contract is quoted in U.S. dollars and cents. The minimum price tick for RBOB is 0.0001, which works out to a price move of $4.20 for one contract. The contract unit is for 42,000 gallons or 1,000 barrels. The initial margin to hold one futures contract is $4,460, with a maintenance margin of $4,060, but these margin amounts are subject to modification by the CME based on the volatility of the contract.

RBOB gasoline futures contract is settled by physical delivery. This means most investors want to liquidate positions prior to the expiration of the contracts. If a position is not liquidated, the holder of a long contract might be responsible for taking delivery of 42,000 gallons of gasoline. It is safe to say that most investors do not want to take physical delivery of that much gas. Thus, investors must be aware of the different deadlines for futures contracts and offset any positions before the risk of delivery comes into play.

Leverage, Calendar Spreads, and Options

Leverage when trading futures with margin can magnify both profits and losses. Alternatively, investors can use futures spreads or calendar spreads, which involve the simultaneous trading of a long futures position in one month and a short futures position in another month (or vice versa). The margin on a calendar spread—for example, buying the April futures contract and selling the May futures contract—is $910 and much less than the margin for just a long or short futures position.

This margin amount with calendar spreads is less because the two contracts have a high degree of correlation and generally move in the same direction together. However, one contract might move more than the other due to market conditions and the goal behind the strategy is to profit from changes in the value in one contract relative to the other, although losses are possible when markets across the specific delivery months do not move as anticipated.

Lastly, investors can trade options or options spreads because puts and calls on RBOB gasoline futures are available for trading as well. Certain options strategies, like vertical spreads, have predefined profits and losses. Importantly, however, RBOB gasoline futures options do not see a great deal of trading activity, and this lack of liquidity makes these contracts less than ideal for aggressive options trading strategies.

Gasoline Options Explained

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content’s accuracy or completeness.

Unleaded Gas Futures Trading Facts

Gasoline is a complex mixture of hundreds of lighter liquid hydrocarbons used in internal combustion engines. Gasoline makes up the largest “cut” from a barrel of crude oil. Approximately half of the barrel of crude oil is refined into gasoline. Gasoline is the largest single volume refined product sold in the United States and accounts for almost half of national oil consumption. Congress amended the Clean Air Act in 1990 to mandate the addition of ethanol to gasoline.(RBOB) Reformulated gasoline blendstock for oxygen blending is the gasoline used since the banning of MTBE as an additive to gasoline. RBOB Unleaded gas future contracts are one of the largest distillates of crude oil contracts traded at the NYMEX. Unleaded gas future contracts may be the most important energy future of all of the petroleum distillates.

Unleaded Gas Futures and Options Quick Facts

42,000 gallon contract size

one cent move equals $420

trades all months

Unleaded gas futures symbol (RB)

Here is the energy products brochure courtesy of the CME Group.

The formula for unleaded gas is adjusted based on the temperature that is anticipated for a certain marketing area up to six times per year. The purpose of this adjustment is to help the gasoline vaporize more readily. Especially in winter facilitating cold starts and better driving performance.

During the Sept. 11 attacks the NYMEX was destroyed but because of the strength and resilience of the futures markets and the exchanges, the unleaded gas future contracts were trading within days of the attacks. This is a testament to the futures markets reliability and integrity.

Are you an unleaded gas hedger? If so, click here to learn more.

RBOB Unleaded Gas Options on Futures Contracts Explained

An unleaded gas call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let’s say that you wanted to purchase a November unleaded gas $2.10 call option and pay a premium of $3,200.

This means that you bought the right but not the obligation to buy 42,000 gallons of November unleaded gas for $2.10 per gallon. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the unleaded gas option to hedge your price risk in the physical unleaded gas market (maybe you are a producer like a refiner or maybe you are a consumber and own a transportation company) or you are speculating that unleaded gas prices will go higher in an attempt to make a profit.

A unleaded gas put option gives the purchaser the right but not the obligation to sell the underlying futures contract for a specific time period and a specific price. Let’s say that you wanted to buy a November unleaded gas $1.99 put option and pay a premium of $3,100.

This means that you have the right but not the obligation to sell 42,000 gallons of November unleaded gas at $1.00 per gallon.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let’s assume the November unleaded gas $2.10 call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the RBOB unleaded gas futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let’s assume that you bought a November unleaded gas $2.10 call option with 60 days left until expiration. Let’s also assume that the unleaded gas futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying futures contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

**Click Here Now! for actual unleaded gas futures and options quotes, prices, expirations, charts .

Gasoline Options Explained

We’re often asked to explain what determines the price of crude oil (as well as bunker fuel, diesel fuel, gasoil, gasoline and jet fuel) options. This post will be the first in a series on how the pricing of crude oil options.

If you are unfamiliar with crude oil options, you can think of them as a form of insurance against rising or falling crude oil prices. In return for the right to buy or sell crude oil (or it’s financial equivalent) without the obligation, options buyers pay (and options sellers receive) an upfront premium, very similar to how you pay a premium for an insurance policy.

The four major variables that determine the price of crude oil options are:

  • Prevailing price of the underlying future or swap relative to the strike price of the option
  • Time value (also know as tenor or duration)
  • Volatility
  • Interest rates

The variable which has the most influence on the price of an option is the relationship between the price of the underlying crude oil futures or swap and the strike price of the option. Depending upon the price of the underlying swap relative to a given strike price, an option is said to be at-the-money, in-the-money, or out-of-the-money.

An option is at-the-money when the strike price equals or is very close to the price of the underlying futures or swap. An option is considered in-the-money when the price of the underlying future or swap is above the strike price of a call option or when the price of the underlying swap is below the strike price of a put option. Lastly, an option is considered out-of-the-money when the price of the underlying future or swap is below the strike price of a call option or when the price of the underlying futures or swap is below the strike price of a put option.

To put the terminology into numerical context, if the June 2020 WTI crude oil futures contract were currently trading at $95/BBL, a June 2020 WTI crude oil call option with a strike price of $90/BBL would be considered in-the-money. On the other hand, if the June 2020 WTI crude oil futures contract were currently trading at $95/BBL, a June 2020 WTI crude oil call option with a strike price of $100/BBL would be considered out-of-the-money.

Conversely, if the June 2020 WTI crude oil futures contract were currently trading at $95/BBL, a June 2020 WTI crude oil put option with a strike price of $90/BBL would be considered out-of-the-money while a put option with a strike price of $100/BBL would be considered in-the-money.

The amount by which an option is in-the-money, is called intrinsic value. As an example, if the July 2020 Brent crude oil futures contract were currently trading at $100/BBL, and you owned a July 2020 Brent crude oil call option with a strike price of $75/BBL, the intrinsic value of your option would be $25/BBL. This intrinsic value, when combined with the time value of the option, are what determine the total value of the option. Alternatively, if an option is out-of-the-money, it has zero intrinsic value. As such, the price of an out-of-the-money option consists solely of the option’s time value.

In our next post we’ll explain how time value influences the value of crude oil options.

UPDATE: This post is the first in a series on crude oil options. The subsequent posts can be found via the following links:

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